US Retail Sales Surge, Jobless Claims Fall, Alleviating Recession Fears
The strong retail and labor data will likely see the Fed reassess its plans for its upcoming policy meeting, with rate cut odds adjusting substantially to reflect the new data.
New economic data on retail sales and jobless claims have provided a surprising confidence boost to the US economy, dispelling growing concerns about a potential recession. On August 15, reports revealed a notable decline in jobless claims alongside a sharp increase in retail sales for July, painting a picture of resilience in both the labor market and consumer spending.
Labor Market Stability Amid Concerns
According to the Department of Labour, the number of Americans filing new claims for unemployment benefits dropped to 227,000 for the week ending August 10, a decrease of 7,000 from the previous week. This marks the second consecutive week of declines in jobless claims, following a spike in late July that had raised fears of a significant economic downturn. Continuing claims, which indicate the number of individuals receiving ongoing unemployment benefits, also decreased by 7,000 to 1.864 million.
“The economy is not going off the rails,” said Christopher Rupkey, chief economist at FWDBONDS. “There is no storm brewing in the labor markets that could possibly argue for a giant-sized 50 basis points rate cut.”
These positive labor market signals are significant, particularly in the wake of a weaker-than-expected July jobs report that had initially spooked investors. The report showed the unemployment rate had risen to a near three-year high of 4.3%, prompting concerns that the U.S. economy might be teetering on the brink of recession.
Retail Sales Exceed Expectations
Adding to the optimism, the latest retail sales data showed a robust 1.0% increase in July, far surpassing analysts’ expectations of a 0.4% rise. This marked the strongest monthly gain in retail sales in a year and a half, driven by significant increases in auto sales, electronics, and food services.
Richard de Chazal, a macro analyst at William Blair, noted:
“Once again, this was further evidence that the U.S. consumer still has the ability to surprise to the upside. This was another solid report, and inconsistent with a consumer who is on the brink of collapse.”
The surge in retail sales has been attributed to a combination of factors, including subsiding inflation, which has helped sustain consumer spending. Notably, motor vehicle and parts dealers saw a 3.6% jump in sales, reversing a decline in June that was linked to a cyberattack. Online sales also continued to grow, albeit at a slower pace, while sectors like electronics and appliance stores experienced a 1.6% increase in sales.
Market Reactions and Federal Reserve Outlook
In response to these encouraging economic indicators, financial markets reacted positively. Wall Street’s main indexes surged, with the S&P 500 (SPX) +1.61%, Dow Jones Industrial Average (DJI) +1.39%, and NASDAQ Composite (IXIC) +2.34%, all posting gains of over 1%.
At the same time, yields on the 10-year U.S. Treasury note rose, reflecting a shift away from the risk-off sentiment that had dominated markets earlier in the month.
However, the strong retail and labor data have also led to a reassessment of the Federal Reserve’s potential actions in its upcoming policy meeting. While there had been speculation about a significant rate cut in September, the odds of such a move have diminished.
According to the CME Group’s FedWatch tool, the probability of a 50 basis-point rate cut has fallen to 26%, down from 41.5% prior to the data release. The odds for a 25 basis-point rate cut at the September meeting currently sit at 74%.
“The Fed should start normalizing policy soon with modest, gradual cuts,” said Tom Simons, U.S. economist at Jefferies. “But there is no sign that the economy is in need of significant accommodation.”
Recession Fears Ease
As the U.S. economy continues to show signs of resilience, particularly in consumer spending and job stability, the narrative of an impending recession appears to be losing traction. However, the road ahead remains complex and potentially volatile with ongoing geopolitical uncertainties and the Federal Reserve’s cautious stance.
Read Next: Fed Eyes Rate Cut as US Inflation Hits Lowest Level Since 2021
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